rydex rsi description

RYDEX RSI SPREAD

APPLICABLE TIME FRAME(S):

SHORT

UPDATE SCHEDULE:

Each weekday morning by 3:00 AM EST for the previous day's activity. Rydex does not release their data until late in the evening or early the next morning, so there will sometimes be an even longer delay with this data.

EXPLANATION:

The Rydex family of mutual funds (www.rydexfunds.com) has a selection of funds that cover broad indices as well as narrower subgroups. These funds are popular with market timers, as some of them are highly leveraged (as much as two-to-one, so for example a 1% move in the S&P would correspond to a 2% move in the fund), and the Dynamic funds can be entered or exited intraday. The most popular funds are based on the S&P 500 and the Nasdaq 100. Rydex makes the asset levels of these funds available to the public each evening, and by observing where these active traders are placing their money, we can get a handle on their sentiment. The fund flows are available late each evening (usually after 11:00pm EST) by calling 1-800-717-7776.

This indicator measures the momentum of asset flows between the bullish and bearish funds, by using a 5-day RSI calculation and taking the difference between the two sets of funds.

The RSI calculation measures the average gain or loss over the previous 5 days and returns a figure between 0 and 100. A reading of 0 essentially means there is no momentum while a reading of 100 means that there is maximum momentum. The Rydex RSI spread is simply the difference between the bull fund RSI and the bear fund RSI. A reading of 100 would mean that the bull RSI is 100 and the bear RSI is 0. A spread reading of -100 would mean the bull RSI is 0 and the bear RSI is 100.

So, if the Rydex RSI spread is high, then the asset flows into the bullish funds are showing significant momentum AND the bearish funds are suffering a loss of momentum. Conversely, if the RSI spread is low, then the momentum has shifted to the bearish funds and away from the bullish funds.

GUIDELINES:

When the RSI spread reaches -60 or below, that is an indication that there is little momentum in the bullish funds and significant momentum in the bearish funds - a good buying opportunity may be at hand. Conversely, when traders are so optimistic that the RSI spread reaches +60 or higher, it usually coincides with a market peak.

The chart below shows a few occurrences of the RSI spread reaching extremes. In November 2002, the markets hit a small snag after the rally from the October lows had generated a lot of momentum into the bullish funds. That little snag brought about a quick shift in asset flows, as the Rydex timers became concerned that it may be the beginning of a new leg lower.

That pessimism was unfounded, however, and we quickly shot back up to the highs. Once we reached those highs, the momentum shifted once again, this time to the bullish funds as we challenged the recent highs. That optimism was once again for naught, as we sank lower. That failure again engendered a significant momentum shift, and the market attempted to rally off that short-term pessimistic extreme in December.

Although this is a real example and points out the value of following this information, we do not mean to intimate that the market ALWAYS peaks when the RSI spread is high, or troughs immediately after the spread hits -60 or below. It is a guideline and not a trading system unto itself.

STATS:

	Since 2000
Mean	-8
St. Dev.*	43
Maximum	90
Minimum	-100

*Standard Deviation. See below...

68% of readings (1 standard deviation) should be between -51 and 35

95% of readings (2 standard deviations) should be between -94 and 78

99% of readings (3 standard deviations) should be between -100 and 100

In other words, we should expect a reading under -94 or over 78 approximately 13 times per year. Since such a reading would be relatively unusual, it suggests that we may be seeing an unsustainable trend. These figures assume a normal distribution curve.

ADDITIONAL RESOURCES:

Rydex mutual fund family (www.rydexfunds.com)